What types of investments should risk-adverse elderly investors consider utilizing for safe returns?
For risk-adverse elderly parents, and considering interest rates on the rise, what would be some alternatives to bank CDs? Some options I am considering are broker CMAs and premium money market funds that would not lock the money for periods of time like a CD, but with lower returns. However, another concern would be insurance in case of a banking issue or crisis — could SIPC or FIDC be counted on for such scenarios? There are also US government bonds, notes, and bills that would have some better safety, and corporate bonds would return more, though at a higher risk. There are dividend stocks, though those also have risk of cost basis decline. Are any of these types of investments more recommended over others for risk-adverse elderly investors? Are there are other types of investments we should be considering?
Great question. My first questions would be current age, investment return expectations, and current liquidity needs of the money. Let’s say return expectations line-up with the "risk adverse" tolerance you mentioned, and we assume > Age 70 using the portfolio to supplement social security income.
I would avoid corporates and dividend stocks. I would recommend utilizing an Income Strategy similar to what we use at Aventine Financial Group, LLC.
The strategy is a blend of Value Advantage (floating money market), US Treasuries, and individual Investment Grade Municipals keeping duration laddered 1 - 3 years. This done correctly should net the client between 3% - 4% annually given today’s federal funds rate.
The strategy is income producing, preserves the capital invested, and offers the comfort of liquidity.
Frank J. Fiumecaldo, CFP®
Founder & Partner
Aventine Financial Group, LLC
c 848.469.6950 | o 212.269.2512
You are on the right track; a lot depends upon your income bracket, age, and other considerations. One very good choice today is two-year U.S. Treasuries which are paying almost 3% and where the interest is completely free of state and local income taxes. You can purchase these at treasurydirect.gov. You can also purchase shorter-dated U.S. Treasuries which pay somewhat less but the money isn't tied up for two years.
I would avoid corporate bonds, dividend stocks, and other assets with fluctuating values. Risk-averse people will tend to sell these whenever they are lowest and buy them when they are highest, so they are best avoided in favor of true risk-free assets which pay around 3%.
Why dont we look at a Fixed annuity.... They are 100% guarenteed by the insurance co. Safe and grow tax def.
Also provide a death benefit, that the basis will be tax free.
Pretty much all of them have a 10% window (per year) to access funds, if you need them.
Happy to help
Another safe, FDIC insured option you did not list is a high yield savings account - these are 100% liquid cash accounts that, in many cases, are paying around 2% in today’s environment. This is a cash vehicle with much better yields than a typical money market and without the liquidity issues of CD’s (CD’s require you to stay in them for a certain period of time to earn the interest, high yield savings accounts do not.)
Looking at various options, one of the best ways to manage risk is through diversification. By diversifying across a variety of asset classes- some stocks, some bonds, some cash, some alternatives – you provide a better hedge than putting all of the investments in one area. When looking to invest in a diversified manner in a low risk way, a strategy may focus on less volatile assets, like shorter-term treasury bonds, and compliment this component with a small stock weight in a diversified indexed ETF.
Any investment decision should be based not just on risk tolerance, but the goals of a portfolio. If elderly parents are living off their assets, they may not be able to sit in all cash-like investments as they could risk out-living their money or having their purchasing power decline due to inflation. Speaking with an advisor is a great way to determine what the right asset blend is to achieve financial goals in a comfortable way.